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CSLB Industry Bulletin - 08/31/2009

Prime Contractors Have Key Responsibility in Subcontractor Bids and Business Practices


SACRAMENTO -CSLB has been receiving an increasing number of complaints from industry leaders and associations regarding subcontractors who submit noticeably low bids on projects, knowing that the bid amount is not sufficient to pay their employees a fair wage and comply with fair labor requirements, such as providing employees with workers’ compensation (WC) insurance.

In some cases, subcontractors fail to pay employees and suppliers altogether; thereby, leaving the employees/suppliers with no alternative but to file a lien against the job site. These unethical business practices harm employees and consumers, and other contractors, as well. Dishonest contractors gain an unfair advantage in competitive bidding by exploiting cheap labor and violating state and federal labor laws.

It is important for prime contractors to realize that they are also at risk when they hire a subcontractor who underbids a job. In fact, the cheapest bid from a second tier contractor on a public works job can be costly to the prime contractor if it is too low. Labor Code Section 2810 specifically precludes a prime contractor from entering into a contract with a subcontractor if the prime knows—or should know—that the contract or agreement does not include sufficient funds to comply with local, state, and federal laws or regulations governing labor and services.

What this means is that the prime contractor is responsible for making sure that accepted bids from subcontractors are sufficient to pay employees’ wages and to provide for WC insurance.

As a prime contractor, if your subcontractor has employees but does not have WC insurance, you could be held liable for any injury sustained by an employee, in addition to being held to answer for violations of the Labor Code and Contractors License Law. Also, you could be subject to disciplinary action if the subcontractor is not withholding state and federal income taxes, federal Social Security taxes, paying disability insurance, and making employment compensation contributions.

A violation of the Labor Code is cause for disciplinary action against a licensed contractor under Business and Professions (B&P) Section 7110. Additionally, under B&P Code Section 7110.5, upon receipt of a certified copy of the Labor Commissioner’s finding of a deliberate or willful violation of the Labor Code by a licensee, the Registrar must initiate disciplinary action within 30 days of the notification.

A Labor Code Section 2810 violation could be referred to a prosecutor on criminal charges under B&P Code Section 17200—Unfair Business Practices, which includes any unlawful, unfair or fraudulent business act or practice. Each violation of B&P Code Section 17200 carries a civil penalty of up to $2,500.

Violations of Labor Code Section 2810 can result in administrative action against the license and civil penalties, if criminal violations are brought forth by state and local prosecutors. Avoid these violations by verifying that subcontractors are bidding enough to pay prevailing wages, and that they have workers’ compensation insurance. You can check on a contractor’s license history, and bond and insurance status by visiting the CSLB Web site at www.cslb.ca.gov.

The prime contractor, as the individual who enters into the contractual agreement with the consumer, is responsible for ensuring that the project is completed for the agreed-upon price. If the consumer is held liable for a subcontractor’s negligent and illegal acts, the prime contractor has additionally violated the terms of the contract and is subject to further discipline.